On the pure theory of wage dispersion

We study an equilibrium model of the labor market with identical firms and homogeneous workers, and with search and on-the-job search. Jobs are dynamic contracts that allow firms to match the worker's outside offers or let the job be terminated. For a non-degenerate distribution of wage offers to arise in the environment, it is necessary and sufficient that (i) there is a positive cost of job turnover, in terminating an existing job or posting a new one; and (ii) there is asymmetric information regarding the worker's outside offers. The model is calibrated to the U.S. labor market to match observed worker flows and the observed mean-min ratio in wages earned. The calibrated model predicts a unimodal distribution for both wages offered and wages earned.